Tax Loss Harvesting is an advanced investment strategy designed to reduce your taxable income while remaining invested in the market and maintaining your long-term investment strategy. Although it is recommended that you consult a financial investment advisor for this type of strategy, it is a good idea to have an understanding of how this could benefit your portfolio.

Proactive wealth management firms and high net worth financial planners, like Morgan Rosel, possess the investing strategy and market knowledge to help you to benefit from a down market. Tax loss harvesting is a perfect example of an advanced strategy that may be overlooked when managing stocks by yourself or using a lazy wealth advisor.

How Tax Loss Harvesting Works

Tax loss harvesting works like this:

  1. You sell an investment that’s underperforming and has unrealized losses.
  2. You immediately reinvest the money from the investment sale into a similar, yet different security or investment that meets your investing needs and asset-allocation strategy.
  3. After 30 days, you may repurchase the original security without violating wash-sale rules, or you may decide to keep the replacement position.
  4. During tax season you use that loss generated to reduce your taxable capital gains and/or offset up to $3,000 of your ordinary income. If you have no realized capital gains to offset, the loss may be carried forward indefinitely into the future until the loss is able to be used.

An Example of Tax Loss Harvesting

Anton invests $50,000 of his income into a company’s stock. After a few months, his stock value has decreased to $25,000. Although loss is never desired, it does happen, and a good investment management team can help make the most of that loss. Anton’s wealth management advisor decides to sell the investment and recognize a $25,000 capital loss. He immediately takes the $25,000 from the sale and invests it in an ETF or stock that is similar in nature to maintain the desired asset allocation.

During that same year, Anton sold a piece of investment real estate and profited $17,000 from the sale. When tax season comes around, Anton’s accountant is able to offset the $17,000 in profit by using $17,000 of the $25,000 loss he sustained. His accountant can use the remaining loss to offset $3,000 of Anton’s income and carry forward the remaining $5,000 until next year’s tax season.

Why is This a Benefit?

Let’s say Anton is in the 32% ordinary income tax bracket, and the 15% capital gains tax bracket. This strategy would save him from paying $3,510 in taxes on $20,000 ($17,000 from the sale of real estate and $3,000 in ordinary income) while still keeping his money invested in the market per his long-term strategy. By harvesting the loss, Anton’s wealth manager was able to save him considerable money that would have been taxed and can in turn be invested, thus leading to more compounding growth over time.

Interested in reading about how we helped a client save over $30,000 in one year? Check out this case study.

What to Avoid with Tax Loss Harvesting?

We always recommend consulting with a tax professional and/or wealth advisor to ensure compliance. However, here are a few things to watch out for when tax loss harvesting.

Wash Sale Rule Definition

Per the IRS Wash Sale definition you are not allowed to sell or trade a security at a loss and within 30 days before or after the sale you buy or trade an identical or very similar security. For example, you can’t sell a S&P 500 mutual fund at a loss and then buy a S&P 500 ETF.

Other Things That Trigger a Wash Sale

Some people try to get creative to avoid triggering a wash sale, however these also don’t work:

  • Spouse buys same fund in their investment
  • Buying the same fund within an IRA or 401k

Curious about what might trigger a wash sale? The best way we’ve heard it explained is that if you’re not confident enough to argue your position with the IRS in court, it’s probably a wash sale.

Why Don’t Wealth Managers Do This More Often?

For high-net-worth individuals, it can be a ton of work to properly harvest losses. Going through thousands of transactions to sell the shares with losses takes time. For too many wealth managers and wealth advisors, it’s just not worth the hassle. However, at Morgan Rosel we always take a proactive approach to wealth management and go the extra mile to help our clients build their wealth. Tax loss harvesting is just one of the many advanced investment strategies we employ for our clients. Call today to set up a meeting with one of our certified financial planners to learn how we can help you.

This commentary reflects the personal opinions, viewpoints and analyses of the MorganRosel Wealth Management, LLC (“MRWM”) employees and guests providing such comments, and should not be regarded as a description of advisory services provided by MRWM or performance returns of any MRWM Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. MRWM manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. MRWM may recommend the services of a third-party attorney, accountant, tax professional, insurance agent, or other specialist to clients. MRWM is not compensated for these referrals.